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Faced with saturation of their core product markets, companies in search of growth are increasingly turning to services.1 A few companies have enjoyed success with this approach — General Electric Co., IBM Corp., Siemens AG and Hewlett-Packard Co., for example. GE’s Transportation Systems division had stable revenues and operating profits between 1999 and 2002, despite absorbing a drop of more than 60% in the number of locomotives it sold. Between 1996 and 2002, revenue from services climbed from $500 million to about $1.5 billion, a trend that the division expects will continue.

Not all product manufacturers are so fortunate. Intel Corp., for instance, spent $150 million to launch a unit whose function was to set up data centers to host Web sites for companies. After three years, Intel shut down the unit and announced that it was refocusing on its core microprocessor business.2 Similarly, Boeing Capital Corp., the financial services subsidiary of Boeing Co., recently reined in its efforts to provide financial services to other industries.3

A systematic approach to creating services-led growth can help managers of product companies improve the odds of success. Companies must begin by redefining their markets in terms of customer activities and customer outcomes instead of products and services. By mapping the customer-activity chain and relating the map to a service-opportunity matrix, managers can systematically explore opportunities for new services in four directions.4 Equally important, they must assess the pitfalls and risks that these opportunities represent, and another matrix — on risk mitigation — serves as a tool for that task.

The Customer-Activity Chain

Companies traditionally think about markets in terms of the offerings they sell. But as Peter Drucker has pointed out, “What the customer buys and considers value is never a product. It is always utility — that is, what a product does for him.”5 Customers seek particular outcomes, and they engage in activities to achieve them.

These activities can be mapped along a customer-activity chain, a concept that has been discussed by several authors in different but broadly consistent ways.6 A customer-activity chain has the following characteristics:

It must represent an end-to-end temporal sequence of logically related activities.

4. The literature that addresses service growth by product companies is limited. For a discussion of the need for manufacturing companies to integrate services and solutions, see R. Wise and P. Baumgartner, “Go Downstream: The New Profit Imperative in Manufacturing,” Harvard Business Review 77 (September–October 1999): 133–141. For a discussion of the transition from products to services, see R. Oliva and R. Kallenberg, “Managing the Transition from Products to Services,” International Journal of Service Industry Management 14, no. 2 (2003): 160–172.

6. Sandra Vandermerwe has proposed the customer-activity cycle (consisting of prepurchase, purchase and postpurchase phases) as a basis for managers to redefine how they view their businesses. See S. Vandermerwe, “Jumping Into the Customer’s Activity Cycle,” Columbia Journal of World Business 28, no. 2 (1993): 46–65. For example, ball-bearing manufacturers may come to see their task as ensuring trouble-free operations, and animal-feed manufacturers may see their objective in terms of enabling productive pig farming. To leverage such thinking, companies should focus on shaping and managing market spaces that are constituted by customer-activity arenas — personal mobility, global-networking capabilities and integrated energy assurance, for example — rather than their product analogs — cars, computers and fuel oil. For a detailed description of market spaces and guidelines to develop them, see S. Vandermerwe, “How Increasing Value to Customers Improves Business Results,” Sloan Management Review 42 (fall 2000): 27–37; and S. Vandermerwe, “Customer Capitalism: The New Business Model of Increasing Returns in New Market Spaces” (London: Nicholas Brealey Publishing, 1999).

A related concept is that of the “metamarket,” defined as “an activity-based view of a market consisting of a sequence of related activities customers engage in to achieve a specific set of outcomes.” Activities that are tightly and logically related in the cognitive space of customers may be spread across providers, time and space in the physical marketplace. A metamarket is created when the cognitive associations between those activities are reproduced in the physical marketplace, thereby streamlining customer activities and providing them with a seamless experience. In the Internet environment, such a streamlining may be achieved by a metamediary, such as Edmunds.com for automobiles. For a discussion on cognitive spaces and metamarkets, see M. Sawhney, “Making New Markets,” Business 2.0, May 1999, 116–121. The metamarkets concept is mentioned as a fundamental concept in P. Kotler, “Marketing Management,” 11th ed. (Upper Saddle River, New Jersey: Prentice Hall, 2003), 1–32.

8. The creation of a memorable and complete customer experience can be an important consideration in the choice of activities for temporal expansion. For a discussion of the design of the customer experience, see B.J. Pine II and J.H. Gilmore, “Welcome to the Experience Economy,” Harvard Business Review 76 (July–August 1998): 97–105.

9. The concept of an adjacent activity chain is distinct from that of the dependent activity cycle/subcycle in S. Vandermerwe, “The Eleventh Commandment: Transforming To ‘Own’ Customers” (West Sussex, England: John Wiley & Sons, 1996), in that the connections between activity cycles in the latter are posited mainly in terms of activities.

10. The concept of core versus noncore or contextual activities as the basis for making outsourcing decisions is explained in detail in G. Moore, “Living on the Faultline: Managing for Shareholder Value in Any Economy” (New York: HarperBusiness, 2002).

11. Nike added its brand to sports camps that already existed. From the perspective of the customer of the sports camp, it did not add a new set of activities, but it did add value through branding. Such branding constitutes a spatial reconfiguration rather than a spatial expansion.

12. For a discussion on the outsourcing of innovation, see J.B. Quinn, “Outsourcing Innovation: The New Engine for Growth,” Sloan Management Review 41 (summer 2000): 13–28.

13. Companies must grow in measured steps away from their existing core competencies. This allows them to avoid the “Alexander problem,” that is, the situation in which they cover so much territory so quickly that they are unable to consolidate and hold on to the captured ground. See C. Zook and J. Allen, “Profit From the Core: Growth Strategy in an Era of Turbulence” (Boston: Harvard Business School Press, 2001).

14. Ideas about and examples of how systematic approaches, methods and tools can be applied to reduce service development risk can be found in H.-J. Bullingera, K.-P. Fähnrichb and T. Meiren, “Service Engineering –– Methodical Development of New Service Products,” International Journal of Production Economics 85, no. 3 (2003): 275–287; and in R.G. Cooper and S.J. Edgett, “Product Development for the Service Sector: Lessons From the Market Leaders” (Cambridge, Massachusetts: Perseus Books, 1999). However, unlike products, the primary execution risk here relates to the successful rollout and deployment of the new service. These risks typically dominate the technical risks encountered during the prelaunch period.

15. In explaining how to discover new points of differentiation, the case of an energy management company that encountered resistance from residential co-op owners to the upfront capital expenditures for energy control equipment is discussed in I.C. MacMillan and R.G. McGrath, “Discovering New Points of Differentiation,” Harvard Business Review 75 (July–August 1997): 134–145. The company succeeded by altering its payment policy so that customers could pay over time out of their energy savings.

About the Authors

Mohanbir Sawhney is the McCormick Tribune Foundation Professor of Technology at Northwestern University’s Kellogg School of Management in Evanston, Illinois.Sridhar Balasubramanian is an assistant professor at the University of North Carolina’s Kenan-Flagler Business School in Chapel Hill.Vish V. Krishnan is an associate professor at the University of Texas’ McCombs School of Business in Austin. They can be reached at mohans@kellogg.northwestern.edu, balasubs@bschool.unc.edu and Krishnan@mail.utexas.edu.